Auditing of Prolongation Costs

On our Claims Class courses we explain that it is necessary to substantiate everything contained in a claim document. This should of course apply to the calculation of prolongation costs.

Such a claim should include:

  • A list of time-related resources deployed (staff, non-productive labour, plant, vehicles, equipment, site buildings and the like)
  • Energy costs such as electricity, water and diesel for time-related plant and equipment
  • Bonds, guarantees and insurances
  • Each item contained in the above lists should be supported by invoices, payroll records and the like to substantiate the individual costs
  • Each item should be supported by a calculation to demonstrate how, for example a monthly cost has been converted to the daily cost.

If the project is relatively small with a limited number of resources and if the delay period is fairly short it would not be a problem to provide all this information within the claim document. I usually include spreadsheet calculations, in bill of quantities format, in an appendix to calculate the total daily cost and then multiply this by the delay period claimed. I also include a separate appendix or appendices in which I include invoices and the like to substantiate the costs included in the spreadsheet calculations. I will usually add a handwritten calculation on such documents to show how the daily cost has been calculated. Each document here is given a reference and the reference is included on the spreadsheet to enable the costs to be easily verified.

Whilst this is reasonably easy to accomplish for a small project, what if the project is a large one with many resources deployed and the delays are extensive? The amount of paperwork required to substantiate the cost in such a situation with be incredibly large and an extremely arduous and time-consuming task to prepare. There is however an alternative to producing skip-loads of paperwork, which may be nicely illustrated by the process that was adopted on a very large project where I was called to assess the contractor’s claimed costs over some lengthy delay periods.

The contractor submitted calculations of the time-related costs, but these were not at this stage substantiated. The items included within the calculations were reviewed and we met to discuss them.

During the discussions, we agreed that several of the claimed cost headings were not time-related. It was also agreed that some costs had been claimed in full whereas only a proportion could be considered as being time-related. An example of this was diesel for the site generators. Some of the energy was used for productive plant and the like and thus was not time-related – it was just consumed at a different time than planned. Other energy was however used for site accommodation, lighting etc. and was time related. In such instances, we agreed a percentage of each monthly cost for inclusion within the claim.

The contractor duly revised his calculations to take into account the various agreements reached.

I then conducted an audit at the contractor and MEP subcontractor’s offices where the accounts were kept. The audit consisted of spot checks on the resources claimed. For example, if the contractor had claimed for ten site management and administration staff, I checked the records to see if ten were actually present on site at the time in question. Once the resources had been checked, spot checks were carried out on the costs of the resources verified by asking the contractor to produce payroll records, invoices, calculations of depreciation costs and the like. The spot checks were usually carried out on the high cost items based on the 80/20 theory that 80% of the total costs will be contained in 20% of the total number of line items. The audit revealed only a few errors, so I was satisfied that the costs were reasonably accurate. The contractor resubmitted his calculations with the errors corrected and these were subsequently used in the prolongation cost award.

Had the audit revealed a substantial number of anomlolies or errors, or had the contractor been unable or unwilling to provide substantiation, I would have rejected the claim and requested the contractor to revise and resubmit it and repeated the process. Usually, when contractors realise that their calculations will be stringently audited, they will make a better effort the second time around.

I have experienced some situations whereby the party responsible for checking the claim will want every cent to be substantiated and justified. In my view this is an unreasonable stance to take and will only serve to prolong the matter to no one’s benefit. It must be remembered that the standard of proof required in civil proceeding is ‘on the balance of probabilities’ and not ‘beyond reasonable doubt’. An audit of the type described above may not check every singe item but, if it is demonstrated that the contractor’s calculations are correct to a reasonably large extent, then they should be accepted.

One last thing…

It is one thing for you yourself to be satisfied, but you may also need to be able to convince the employer or his internal auditors that you have carried out your duties in a proper manner. Bearing this in mind, I created audit sheets where each audited item was recorded and I obtained copies of the records provided during the audit. In this way, I can, if necessary, produce a full audit trail or answer any questions that may be raised.